The surge in oil prices has completely overturned the U.S. debt market's bets on the Federal Reserve cutting interest rates in 2026.

Due to the oil-driven inflation shock triggered by the Iran war, bond traders’ bets on the Federal Reserve cutting interest rates have fallen flat, and they are now eager to find new strategies. As major central banks issue warnings about inflation, short-term government bond yields have soared, and traders have completely abandoned expectations of further monetary easing by the Fed in 2026. By Friday, with global benchmark crude oil prices remaining at their highest levels since 2022, market sentiment has undergone a dramatic shift, with traders even considering a 50% chance that the Fed will raise interest rates before October. “As long as the war remains in an escalation mode rather than a cooling mode, market concerns about inflation will outweigh concerns about economic growth. Considering recent instances of supply shocks, this mindset is reasonable,” said John Briggs, head of US interest rate strategy at Banque Commerciale Française in North America. He added, “Now is a good time to step back and wait for the dust to settle before reassessing.”